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Summer Vacation Planning - Should I Purchase CDW/LDW Insurance on My Vacation Car Rental?

If you're like most of us you're thinking ahead to the warm days of summer and family vacation. Approximately 4 million passengers flew out of LAX to U.S. destinations in July 2006, and that number is expected to rise this year!

Most of these travellers will be thinking of renting a car at their destinations. The question we're asked the most about these rentals is "Should I get (or do I have) rental car coverage on my auto insurance policy?"

In our opinion, although most collision damage waivers/loss damage waiver (CDW/LDW) fees may seem to be expensive, if you are not 100% covered under your personal auto policy you are best advised to purchase the CDW/LDW for short-term rentals.

Here's some of the reasoning behind our recommendation:

1. Loss Valuation
Your personal auto policy may cover the lesser of the "actual cash value" of the vehicle or the amount "necessary" to repair or replace the damaged property. The rental agreement may contractually obligate you to reimburse the rental car company for the "full value" of the vehicle.

2. Loss Settlement
As implied above, there may very well be disagreement over the value of the vehicle or the amount charged for labor and materials to repair the property-depending on your personal auto policy, the appraisal clause may be invoked with its accompanying costs. More importantly, your personal auto policy insurer has the right to "...inspect and appraise the damaged property before its repair or disposal." The rental car company may choose to repair immediately, potentially resulting in a lack of your personal auto policy coverage because of failure to comply with this condition.

3. Loss Payment
The rental agreement may require immediate reimbursement for damages and it is not uncommon for the rental car company to charge your credit card.

4. Loss Damage Waivers (LDW)
The rental agreement may require reimbursement for more than collision-some include theft under certain circumstances and others may make you responsible for any "loss" in value beyond normal wear and tear. Obviously, your personal auto policy must include collision coverage on at least one vehicle for coverage to transfer to the rental auto. If the rental agreement includes a LDW (not just collision), the policy must also include comprehensive coverage to adequately protect you.

5. Indirect Losses
You most likely will be responsible for the rental car company's loss of rental income on their damaged vehicle. Your personal auto policy has, at best, daily and maximum caps for this indirect loss and, depending on your policy, you may be required to pay certain loss of income expenses.

6. Administrative Expenses
The rental contract may make you liable for various "administrative" or loss-related expenses such as towing, appraisal, claims adjustment, etc., which are expenses not normally covered by your personal auto policy.

7. Other Insurance
Your personal auto policy may say it is excess over: (1) Any coverage provided by the owner of the auto; (2) any other applicable physical damage insurance; and (3) any other source of recovery applicable to the loss-travel policies, credit card coverages, etc. The potential controversy over who pays what is obvious and can result in litigation. In addition, many states (i.e., Maryland, Minnesota, New York, Tennessee, etc.) have statutes, proprietary forms, or case law precedents that may govern this and other rental car exposures.

8. Excluded Vehicles & Territories
Your personal auto policy normally does not provide physical damage coverage for motorcycles or other non-auto/pickup/van vehicles (i.e., motor homes), and use of covered vehicles is limited to the United States, its territories and possessions, Puerto Rico, and Canada (the rental agreement may also exclude operation outside a specific geographical area). In addition, if you are renting a trailer (U-Haul, camper trailer, etc.), coverage is limited to $500. you usually have no choice but to rely on the CDW or LDW for coverage.

9. Excluded Uses & Drivers
Your personal auto policy may have limitations on use of vehicles that are not otherwise excluded by the rental agreement CDW or LDW. Also, your personal auto policy may include an exclusionary endorsement for certain individuals or may apply only to designated individuals. The CDW probably also will apply only to designated individuals, but operators for which no personal auto policy coverage is available may be afforded protection under the rental agreement by designating them as such.

10. Additional and/or Future Costs
Your personal auto policy most certainly will include a deductible of $100 to $500 or more. In addition, payment for damage to a rental car may result in a significant premium increase (if not non-renewal) via surcharges or loss of credits.

** Disclaimer: The above information is based on a "standard" personal auto policy and typical rental car agreements. Be aware that these contracts may vary from state to state and there may be statutory exceptions (i.e., the State of New York). Due to the brevity of this article, we cannot analyze every possible loss exposure and exception to the general guidelines above.